Dollar gains against most rivals; yen is exception

Japanese yen climbs, while British pound slumps after downbeat data

PolyaLesova

NEW YORK (MarketWatch) -- The U.S. dollar rose against other major currencies Monday, but fell against the Japanese yen, as investors hunted for safety after downbeat economic data around the world raised economic fears and heightened risk aversion.

The dollar index
DXY, -0.07%
which tracks the performance of the dollar against a trade-weighted basket of six major currencies, was up 0.3% at 86.991. The euro fell 0.7% to $1.2610.

"There is no question that the meltdown in the equity market single-handedly triggered the sell-off in the currency market today," said Kathy Lien, director of currency research at GFT.

"The flight to safety has led to repatriation back into U.S. dollars even though there is still more trouble ahead for the U.S. economy," she wrote in a note to clients.

The British pound dropped 3.2% to $1.4883 after hitting an intraday low of $1.4805.

But the dollar tumbled against its Japanese counterpart, falling 2.6% to 93.05 yen.

The Bank of Japan decided to call an unscheduled monetary policy meeting Tuesday, the central bank said on its Web site. The purpose of the meeting is to discuss monetary control matters on possible changes in the treatment of corporate debt as collateral and possible ways to enhance flexibility in funds-supplying operations collateralized by corporate debt, the BOJ said.

"The BoJ will discuss measures to ease credit constraints, but might not cut rates. Even so, BoJ Governor Shirakawa has, quite legitimately, become more downbeat on the 'severe state' of the Japanese economy," said David Watt, senior currency strategist at RBC Capital Markets in a research note.

The yen frequently rises when risk appetite falls, as traders buy back low-yielding currencies and pare their bets against higher-yielding ones.

'People who count in the United Kingdom are in the process of thinking about [joining the euro zone].'
Jose Manuel Barroso, European Union

Risk aversion rose after manufacturing gauges in the United States, China, the euro zone and Britain all showed significant drops, with the Chinese and British gauge dropping to record lows.

In the U.S., manufacturing activity declined at the fastest pace in 26 years in November, the Institute for Supply Management reported Monday.

The ISM index fell to 36.2% in November from 38.9% in October. It's the lowest reading since May 1982. Economists were expecting the ISM index to fall to 37%. Readings under 50% indicate most firms reported worsening conditions. See Economic Report.

The U.S. economy entered a recession in December 2007, according to a committee of economists at the private National Bureau of Economic Research. See Economic Report.

The U.S. economy is under "considerable stress," Federal Reserve Chairman Ben Bernanke said at a Dallas Fed conference, and is likely to remain weak for some time. The economy "downshifted further" after the financial crisis of September, he said.

The Fed has lowered interest rates just about as far as they can go, but the U.S. central bank still has plenty of available firepower it could deploy to restore financial markets to normal, Bernanke said. Read The Fed.

Economic weakness

"At the start of December, the relationship between the low-yielding yen, Swiss franc and U.S. dollar has tightened again due to economic weakness," wrote currency analysts at Brown Brothers Harriman in New York, in a note to clients Monday.

"Today's dreadful economic data from China to Germany, the U.K. and Sweden and evidence of a further deterioration in U.S. data today, are helping to fuel talk of more aggressive policy action ahead of this week's central bank meetings," they said.

The European Central Bank and the Bank of England are expected to cut interest rates further at their policy meetings Thursday.

The U.K. and euro-area PMI also hit record lows, with the euro-area PMI falling to 35.6 in November from 41.1 in October and the U.K. PMI falling to 34.4 from 40.7 in October.

Sterling also dropped as European Union President Jose Manuel Barroso said in a French radio station interview that U.K. officials "who matter" were considering joining the euro.

Barroso said that while a majority in the U.K. is opposed to the idea, "people who count in the United Kingdom are in the process of thinking about it."

"While the Barroso comment might dampen near-term sterling volatility against the euro, we see the U.K. not getting into [euro zone] any time soon," said strategists at BNP Paribas.

China's currency staged a record loss against the U.S. dollar Monday, falling to the lower end of its daily trading limit, in what some analysts said is a policy shift as authorities let the yuan depreciate against the greenback in an effort to help bolster the decelerating economy.

A gauge of China's manufacturing activity in November, as compiled by brokerage CLSA Asia-Pacific Markets, marked the sharpest drop in the history of the survey, which began in 2004. The Purchasing Managers Index fell to 40.9 in November, from 45.2 in the preceding month, its fourth straight monthly decline. See related story.

Unlike the U.S. and European data, a Chinese PMI below 50 doesn't indicate economic contraction, though it does indicate slowing growth in the key emerging-markets economy.

"With the U.S., Europe and Japan being in recession, Chinese production is being hurt by diminishing export demand," said analysts at Sarasin.

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